TXNM Energy Inc (TXNM) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the PNM Resources first-quarter conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I will now like to turn the call over to Jimmie Blotter, Investor Relations Director. You may begin.

Thank you, Destiny. And thank you everyone for joining us this morning for the PNM Resources first-quarter 2014 earnings conference call. Please note that the presentation for this conference call and other supporting documents are available on our website at PNMresources.com.

Joining me today are PNM Resources Chairman, President, and CEO, Pat Vincent-Collawn, and Chuck Eldred, our CFO, as well as several other members of our executive management team.

Before I turn the call over to Pat, I need to remind you that some of the information provided this morning should be considered forward-looking statements pursuant to the Private Securities Litigation Reform Act of 1995. We caution you that all of the forward-looking statements are based upon current expectations and estimates, and that PNM Resources assumes no obligation to update this information.

For a detailed discussion of factors affecting PNM Resources' results, please refer to our current and future annual reports on Form 10K, quarterly reports on Form 10-Q, as well as reports on Form 8-K filed with the SEC.

And with that, I will turn the call over to Pat.

Thank you, Jimmie. Good morning everyone, and thank you for joining us on this beautiful sunny spring New Mexico morning. We will begin in Slide 4 with the headlines from the first quarter.

GAAP earnings were up $0.03 per share compared to quarter one in 2013, while ongoing earnings were equal year over year. We are confident that the Company continues to be on the right track, and we are affirming our 2014 consolidated ongoing earning guidance range of $1.42 to $1.52 per diluted share.

On April 30, the EPA gave us some good news and issued its proposed draft approval for our BART filing regarding the San Juan generation station. Final EPA approval is expected about the end of September, and I'll have a more detailed BART update in a few minutes.

I'm also pleased to note that this past Wednesday, Standard & Poor's recognized the continued improvements in our business by changing the outlook for PNM Resources, PNM, and TNMP to positive. Both S&P and Moody's now have the outlook for all of our entities rated as positive.

On Slide 5 I will start with PNM. In the first quarter, we saw decline in load year over year. The industrial and commercial classes showed decreases, and in each case it was due to a specific large customer looking to cut expenses. Residential load was also down this quarter.

If we look at what is driving the numbers, New Mexico still lags the nation in post-recession recovery. The local economy continues to show signs of a rebound, but it has not been able yet to build momentum. Employment growth for both the state and Albuquerque Metro was positive, although it is only 0.2%.

New Mexico's unemployment rate had been declining in 2013, but increased in the first quarter and it's now above the national average, with New Mexico's rate being at 7%. And today, as you saw the national rate dropped to 6.3%.

PNM continues to see customer growth, as well as increasing peak demand levels while at the same time use per customer has decreased. The customer growth we have seen has not yet been strong enough to offset the decreased usage, which we believe is the result of economic concerns as well as energy efficiency.

There are some encouraging signs regarding the economy. Economic development activity is up. The state is seeing significantly more serious inquiries from business considering locating here.

We believe the renewed interest is the result of more aggressive recruitment efforts at both the state and local levels, and because of recent tax reform measures that were implemented by the governor and approved by the legislature.

In fact, there was a recent update to an Ernst & Young tax study that shows New Mexico has the lowest effective tax rate in our region on most manufacturing segment, and is among the lowest in other industry segments.

The word is spreading that New Mexico is open for business, and is willing to compete.

And as we noted in our fourth-quarter call, PNM has also increased its support of economic development and job-training initiatives, and we are actively working with our community partners to find ways to jumpstart the local economy.

So the bottom line here in New Mexico is that the economy continues to show signs of recovery, but we have not yet seen that in PNM's load numbers.

Over in Texas, the economy keeps charging ahead, with consistent growth for TNMP. Residential was up 2.5%, while commercial showed an impressive gain of just under 16%.

The areas in which TNMP service [territories] are located are all doing very well during the economic recovery. Growing 12-month employment numbers show a 2.9% gain as of February, and that growth is expected to continue, forecasted at about 2.3% for 2014.

Also, the Texas unemployment rate has dropped to 5.5%. Chuck will cover the effects that we expect both PNM's and TNMP's loads to have on our 2014 results.

Turn to Slide 6 now for more details on our BART filing. The approval process for the revised state implementation plan for San Juan continues to move forward on two tracks, with the EPA, as I mentioned, and with the New Mexico Public Regulation Commission.

You can see the major components of our filings with the New Mexico Public Regulation Commission on the left side of the slide.

The filing was made last December and was it deemed complete on February 11 of this year. The staff and intervener testimony is due by July 7, with a hearing scheduled August 19 through 29. And the Commission's current schedule indicates a probable ruling by the end of this year. And of course, settlement discussions can occur at any time in this process.

I want to turn to Slide 7 for a quick update on other pending regulatory filings. The first one, Delta Person. As we have reported, the PRC granted PNM a CCN to own and operate the Delta Person peaking facility. We now expect to close on this transaction by June 30.

The next one, La Luz, we had an application to build the 40-megawatt La Luz gas-fired peaker, and it's moving forward at the Mexico Commission. In a very brief public hearing this past Tuesday, the opposition to the stipulated agreement we reached with the Commission in March was withdrawn.

The hearing examiner will be recommending approval of the agreement, and we now anticipate the approval process to be finalized in late second quarter or in the third quarter.

On April 23, the Commission gave its final approval to the stipulated agreement regarding our fuel clause filing. The agreement provides for the continuation of the fuel clause, including a quarterly reset of the fuel adjustment factor.

Want to update you quickly on the FERC transmission formula rate case. On June 1, we will file and implement the annual update based on 2013 information. This is expected to result in a slight increase to revenue, subject to refund, pending the outcome of the ongoing settlement discussions.

There's one item that is not on the slide I want to quickly mention. I want to close the loop on our discussions regarding Gallup. As we expected and mentioned in the fourth quarter earnings call, PNM was not selected in the RFP to provide power to the City of Gallup. As a result, our agreement with Gallup will expire at the end of June.

Just quickly in Texas, on January 21, TNMP filed with the Texas Commission for a transmission cost-of-service increase. As expected, the Commission approved the request, which will boost revenues by $2.9 million annually.

So now I'll turn things over to Chuck for an in-depth look at the numbers.

Thank you Pat, and good morning. Let's begin with a financial review with the first quarter results, beginning on Slide 9 of the presentation.

First quarter ongoing EPS was flat at $0.18 compared to the first quarter 2013. TNMP was up $0.04, in corporate and other, benefiting from reduced interest expense, was up $0.02. These were offset it by PNM, which was down $0.06.

Now I?ll go into more detail on Slide 10. Starting with PNM's positive drivers, rate relief added $0.01. This includes both the renewable rider and the temporary Gallup contract. Palo Verde III market prices contributed $0.01, as did gains from Palo Verde Nuclear Decommissioning Trust.

Offsetting these were an increase in depreciation and property taxes of $0.01, and an increase in outage cost of $0.02. During the first quarter the weather in New Mexico was very mild compared to the severe weather, or Polar Vortex that some may refer to, that most of you have experienced. As a result, weather was down $0.02.

Heating degree days were down 14% compared to the first quarter of 2013 and 7% compared to normal. The continued softness in PNM's load for the quarter represented a decrease in $0.03.

Moving to TNMP drivers in total, we are up $0.04. Rate relief for TCOS filings added $0.01, load and weather was a combined improvement of $0.02, the strong Texas economy result in higher residential usage and higher demand charges from large commercial customers, causing TNMP's load to be up $0.015. Weather accounted for $0.005.

Heating degree days were up 30% compared to Q1 of 2013 and 27% compared to normal. Offsetting this was 37% decline in cooling degree days compared to last year and 57% compared to normal.

Now turning to Slide 11. Before reviewing the guidance details, I want to announce that we have just signed a non-binding letter of intent for the purchase of the remaining 33 megawatts of Palo Verde Unit 2 leases from Cypress.

The terms are set up so that upon receiving Board approval, we have the option to close as early as this year on a transaction. We expect this will result in a rate base value of $82 million, or $2,500 per KW in January 2016.

Now for guidance. As Pat mentioned, we are affirming our guidance range of $1.42 to $1.52 for this year. We continue to expect PNM to be $1.15 to $1.21 and TNMP to be $0.38 to $0.40. Given the strength in TNMP's load, they will likely come in in the upper end or even exceed their guidance range, as we expect that PNM will be in the lower portion of their range for the year. In total, we expect to be at the midpoint of guidance.

The strength in the Texas economy is helping to offset the soft load at PNM. We have managed O&M savings by capturing process efficiencies. As a result, we have been able to keep our non-labor (inaudible) basically flat for 2014 compared to last year.

We continue to execute our plans to meet our total return goal of 10% to 13% by 2016. It's important to note that we are not depending on load growth to meet the total return.

Finally related to guidance, I want to remind you that we do provide a quarterly earnings distribution when we give guidance. The chart on the bottom half of Slide 11 is the distribution that we provided for you in December.

Historically, first quarter has been about 13% of our earnings, and as you can see, we expect about 70% of the earnings to come in during the second and third quarters.

With that, I'll turn it back over to Pat.

Thank you, Chuck. I'm pleased with the Company's performance and how we continue to effectively manage operations, especially during continued economic challenges in New Mexico.

Going forward, we have a lot to do this year, and we're confident that with our rate base growth, fine-tuning our businesses, and above average dividend growth, we will deliver our 10% to 13% total return proposition.

Operator, we will now open it up for questions.

(Operator Instructions)

Paul Fremont, Jefferies.

Thank you very much. I guess going back to your 2014 earnings guidance presentation, the load that you were projecting for PNM was 0% to minus 1%, and I think you give a sensitivity of a nickel for each percent. Are you changing the annual expectation, in terms of load for 2014, given sort of the 2.9% reduction in the first quarter?

Hi, Paul. This is Chuck. The answer is no, we're going to keep with the guidance range of 0% to negative 1%. If you were to get into the details of our load, January and February were frankly right on target.

It was March, which we consider a shoulder month as well as April, and so you'd see some softness in the load that we feel will be rebounded as we go throughout the second and third quarters.

We did have mild weather, as we mentioned, which kept a lot of customers from heating and cooling systems to be used, such that that resulted in a decrease of $0.02 for the quarter.

So we're still confident that we will continue to see that range of 0% to 1%, but we stay very cautiously towards understanding the impacts of that. And as a result, we continue to manage and mitigate any kind of exposure to load, as I mentioned keeping O&M flat.

We've had very strong load growth at TNMP, and as I said, could very well easily exceed the guidance of that to help offset.

Another example is the fuel continuation filing at PNM, which allows us to get -- keep a 10% of our off-system sales, which was really outside of guidance for this year. That's at least another $0.01.

And we've had some improvement in our pension and retire medical expenses. The bottom line is, we continue to manage the risk of the load degradation until we begin to see a stronger improvement, but they don't feel, given the shoulder months and where we are first quarter, that we feel we need to change the guidance of 0% to minus 1%.

Okay, because also in the assumptions for both -- for O&M for both PNM and TNMP, your expectation, your built-in expectation, I think, was for flat O&M. So is there some other potential offset if the load growth does come in weaker?

We do have contingency plans that we have built into our managing of the business at PNM. And as I mentioned, we expect to get 10% of off-system sales, which is helping to offset some of that impact for this year, which was outside of guidance.

And the pension and medical retiree expenses, we're picking up some additional returns based on the performance and assumptions built in the original guidance, that we will continue to manage the risk of the load and keep a close eye on it as we go through the year. But still comfortable we can offset any impacts on load.

Okay. Then my other question, I think relates to your planned GRC filing, is that likely to occur later this year?

Yes. Paul, we've talked about filing in December of this year for rates that would go into effect on January 1, 2016.

Okay. Thank you very much.

Thanks, Paul.

Ali Agha, SunTrust.

Thank you. Good morning.

Good morning, Ali.

Just one quick accounting question on the quarter. Noticed that the effective tax rate looked a little low, if my math was right, coming in at around 28%. So your normal 35%, 36%. Was there something going on, on the tax front?

Not that I'm aware of that would be anything unusual. You may want to just follow up with Jimmie on that to kind of see what your assumptions are, but nothing unusual that happened in the first quarter that would trigger any comment on that.

And then separately, Pat, you talked about with regards to the BART filing at the Commission that settlements can happen, could really be at any time.

Could you give us some insight, at least, quantitatively to the receptivity of settlement, and realistically from a timing perspective, would we think that's closer to the time of the hearing? When would be the obvious inflection point for a settlement to occur?

I think everyone is very receptive to a settlement, Ali. This is a very complicated case. And I think that settling it would make everybody more comfortable, because when you do settlements there is a lot more ability to give-and-take.

Usually there is two times that it is more likely to have a settlement. Sometimes you have them right before the staff and intervener testimony is due so that the testimony that's filed is that of the settlement. The other logical time you tend to get one is right before the hearings start. That tends to focus the minds.

So those are the two times historically we have had settlements. I think either of those could be reasonable. And there really is -- they?re very much an openness to settling. The staff has been pretty busy up until now.

Right. In terms of, even there have been some more separate filings. The fact that you're going through this complicated process night now, and right after that you're going to file your rate case, how concerned are you by just the way the chronology of the timing is playing out in terms of putting a lot of stuff in front of staff and the Commission? Do you think that could have some negative implications for the rate case, just from a timing perspective?

If we look at what the staff and the Commission has on their plate just holistically, the case won't go until the end of the year. Like I said, the BART stuff doesn't hit the Commission until the end of the year itself. The TECO hearings are done. SPS' rate case is done. So they won't be back in front of the Commission for a while. El Paso won't be there for a while.

So it is just kind of us, and the way the Commission's schedule is set is that we would have a ruling on BART before the end of the year, and then the rate case doesn't get filed until the end of the year, and usually there is no action on that until the following year.

So we've made sure that there is not pancake things on them and they've got a little breathing room in between the filings, for the work that needs to be done on the filings.

Okay. Last question. Looks like, Chuck from your comments, given some cost savings, et cetera, you will still expect PNM to come in, at the retail level, to own its authorized ROE.

Do think that still the case? And A, given that assumption, is the focus on the next rate case primarily going to be the Palo Verde lease acquisition, or how are you going to frame this rate case coming up?

Well, to a lot of what Pat had just referred to is the fact that we will have potential settlement discussions that involved San Juan and Palo Verde 3. That's part of what I think is the motivation, they're trying to work through the expectation the 2016 rate case of understanding what we settle with regarding things that take place a 2018 rate case. So we're making good progress.

We've had some short filings with the La Luz peaking station. That was settled. That was put out of the way. The continuation filing was settled. That's been put out of the way.

So the Palo Verde leases would be probably the new piece of information that they'll deal with in 2016. But beyond that, it's just the normal -- ROE depreciation schedules, CapEx for infrastructure investment, just the core fundamental things that are necessary to get recovery in the business.

So we don't see any controversy there, but it's just more of making sure there's a lot of transparency and understanding around the BART and the 2018 the Palo Verde 3 and the San Juan unit being shut down. So that's why where all motivated to begin to work through potential settlements to clear the expectations and understanding for future rate increases.

One of the key things in 2016 will also be resetting the volume. If growth stays flat or picks up slightly, we get a chance to reset that, and it's a future test year. So that also helps in the next rate case.

Got it. Thank you.

Paul Ridzon, KeyBanc.

Hello?

Good morning.

Can you give a little bit more clarity on the Gallup contract? Is that $0.03 impact to 2014, or is that an annual earnings number?

No, that's $0.03 impact for 2014, the last half of the year. And the contract falls off in the end of June.

So into 2015 there should be another $0.03 impact as you get to full year?

Actually for full year is closer to $0.05 to $0.06.

Okay. And is a GRC the only way can ?- you could seek relief if you continue to have customer attrition?

Yes. GRC is the only thing we have. We have an energy efficiency rider and we have a renewable rider, but we don't have any other mechanisms here in New Mexico.

The one thing to remember that in 2015 the half-price lease payments at Palo Verde go in there. So that provides relief for next year if there were to be continued volume erosion.

Okay. And then do have any other large C&Is who are on the bubble that there could be risk of losing?

No, we actually don't -- we're not a very large business-focused state here. Our industrial class is only about 15% of our sales. It's pretty small. And the businesses we tend to have here tend to be more small and midsize businesses. So it's more just they're fine-tuning their operations as opposed to anyone leaving.

Thank you very much.

You're welcome.

Brian Russo, Ladenburg Thalmann.

Hello, good morning.

Hello, Brian.

I'm just curious. We've heard from a number of other utilities that have expressed some skepticism on their weather-normalized load growth models, given the volatility we saw in the first quarter weather.

And I'm just curious how confident are you in that negative 2.9% at PNM? And whereas 8% weather-normalized load growth at TNMP seems to be somewhat of an outlier.

Brian, forecasters don't like it when I say this, but it is just as much of it art as it is of a science, especially on a quarterly basis. I think sometimes it's difficult to tell.

We had very different weather. We didn't get the Polar Vortex down here. And personally, we're happy about that. Corporately we would have liked it. So I don't get too upset about looking at the quarters like that, because there is a lot of art in that weather normalization.

You also see, Brian, when you look at a 5-year normalization versus 10-year normalization, do you see some differences relative to increased load on a 5-year basis. So we look at all of the sensitivities, and we've done some updated analysis in our models, client survey work that's been done to get a better feel for what customer usage is.

So we really have fine-tuned things, and it's just -- a lot of it is the economy. And the economy being slow and then sluggish in New Mexico, and rebounding. So we're just experiencing that, but we're confident over time that will work itself back into being positive.

Okay. And you mentioned one large industrial customer that the load declined due to managing expenses. Is that viewed as temporary, or is that the new level that that customer will operate at?

I suspect, Brian, it is the new level the customer's going to operate at.

Okay. And then lastly, I'm not sure if you mentioned this earlier, but what was the impact of weather versus normal?

It was minus $0.02.

Okay, great. Thank you.

(Operator Instructions)

Kit Konolige, BGC.

Good morning, guys.

Good morning, Kit.

So just to explore the sales number a little bit more. I think, Pat, you mentioned in your comments at the beginning that it appeared that there was an issue with usage decline per customer that you attributed to a weak economy.

Is -- have your guys done any work in trying to dig into that issue, which, obviously, if that's going to continue, it could be a serious problem? Or on the other hand, how confident are you that if unemployment starts improving and the economy overall starts growing better, that usage issues would decline or disappear, and sales growth would resume?

Kit, I think there's two things. One is that just on terms of the whole load, customer growth picks up again. So even if your usages is flat, when your economy picks up and you get job growth, you get customer growth. So that offsets some decline in usage.

I think that this year when we forecasted the 0% to 1% down, we do see some of this decline being permanent. New lighting standards are in place for residential customers. You can't buy those incandescent bulbs anymore, and lighting is a big piece of our load here.

But a lot of it we just think, from talking to people, is that they are just being conservative now because they are a bit nervous about the economy. The restaurants are down. People are just kind of watching their pocketbooks.

And when you get weather that's different, people don't turn on their air-conditioners as early. Once people turn on their air-conditioners, for example, they leave them on. And we hit a new peak last summer. So we know people are using their air-conditioners.

A lot of this, and I think it was Brian's question. A lot of it's the weather normalization and the usage are kind of hard to pick apart. But we ?- like I say, we do see some permanent changes due to energy efficiency. But we think it will pick up again when the economy starts growing.

Great. And when it does -- what's your view of a five-year sales growth rate, let's say?

Well, really, I think as Pat mentioned earlier, the 2016 rate case will adjust for the impacts on load. And whether we pursue decoupling or what methodology that ultimately is pursued in that 2016 case. And then we will build off of a new base there.

But we're still seeing just a -- roughly around a 1% type of sales growth, and we begin to see that increase over a longer period of time. But it?s as Pat said, it's more of an art and it's more of when the economy in New Mexico begins to recover.

And with the governor pursuing some tax incentives and reductions, we are beginning to see interest and inquiries in New Mexico. And certainly there is opportunities over the next few years to see some growth in New Mexico more than what we are able to recognize right now. That would be our more opportunistic view in the future.

And our commercial growth really follows very closely residential growth and good job growth because most of it is small- and medium-sized commercial. So when that picks up, commercial starts again.

Got it. Okay. Thank you.

Thanks, Kit.

Paul Ridzon, KeyBanc.

Is there any sense of the appetite for decoupling in the state? Have you had any discussions?

We have, Paul. And actually in the rate case a while back, we did put it in. We took it out as part of the stipulation because [staff] and the interveners were not ready for it yet. But that is one of the things we're looking very closely, and we will probably file in the rate case.

The nice thing about decoupling is that it really encourages everyone to do energy efficiency, which is very popular with customers. And so I think that there's becoming more and more of an appetite for it. And our neighboring state, Arizona, has gone there now. And I think the time is right for it here.

Would you pursue weather decoupling or just more conservation decoupling?

We're still looking at that.

Okay. Thanks again.

I'm not showing any further questions at the time. I'd like to turn it back to Pat Collawn for closing remarks.

Thank you. And thank you everybody for spending time with us on this spring morning. If you have any questions, please follow up with us. And we look forward to seeing many of you in the months to come. Have a great weekend.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.